Tax-to-GDP ratio

Business Recorder

5 days ago

EDITORIAL: In the weekly briefing provided to Prime Minister Shehbaz Sharif by the Chairman of the Federal Board of Revenue (FBR) the rise in the tax-to-Gross Domestic Product (GDP) ratio by 1.5 percentage points to 10.5 percent was highlighted as a notable achievement to reach the government's target of 13 percent under its three-year reform agenda agreed with the International Monetary Fund (IMF). Three observations are critical.
Total FBR collections (revised) as noted in the budget 2025–26 documents are 11,900 billion rupees in 2024-25 while the revised GDP for the year has been cited as 114,692 billion rupees which provides the tax-to-GDP ratio of 10.3 percent. One may assume that the additional 0.2 percent as claimed by the FBR chief to the Prime Minister indicated higher taxes collected than were projected in the budget documents. Be that as it may, on 1 July, the first day of fiscal 2025-26, FBR acknowledged that provisional collections were 11,722 billion rupees July-June 2025 (10.2 percent of revised GDP) instead of 11,900 billion rupees, a shortfall of 178 billion rupees, after the annual tax collection target was reduced from the budgeted 12,970 billion rupees but revised downward twice — to 12,334 billion rupees and then again to 11,900 billion rupees.
Second, the 1.5 percent rise was achieved because the government failed to generate 124,160 billion rupees budgeted projection of GDP for last fiscal year with a significant shortfall of 9,468 billion rupees that can be attributed to contractionary monetary and fiscal policies, supported by the IMF, that were severely anti-growth. Had the budgeted GDP growth rate been achieved the projected tax-to-GDP ratio would have been 9.5 percent, that would have shown no rise in the tax-to-GDP ratio from 2023-24. The budget for fiscal year 2024-25 was approved by the Fund, and therefore it is unclear why the Fund agreed to a tax-to-GDP ratio which was the same as in the year before and analysts may well challenge the claim by the FBR that the rise is a component of the three-year reform agenda agreed with the Fund. What is, however, quite worrisome is that the failure to achieve the budgeted GDP growth for 2024-25 has led to not only to very high poverty levels in the country, 44.2 percent as calculated by the World Bank, but also high levels of unemployment, around 22 percent, as gleaned by independent economists from the digital housing survey of 2023.
And finally, there is overwhelming empirical evidence that the government's reform efforts are focused on raising tax revenue rather than in reforming an unfair, inequitable and anomalous tax structure given that 75 to 80 percent of all FBR collections under direct taxes are being levied as withholding taxes in the sales tax mode which is an indirect tax whose incidence on the poor is greater than on the rich. Sadly, the FBR continues with this practice in spite of explicit instructions by the Auditor General of Pakistan to credit indirect taxes under the appropriate sub-heading.
The focus of the incumbent government appears to be the same as during previous administrations: focus on raising total revenue rather than reforming the tax structure that is the reason behind sustained elite capture of revenue sources, the root cause of rising poverty levels. There is no doubt that the Finance Bill 2025 has increased the enforcement powers of the FBR officials, scaled down by the parliamentary committee, but even in their amended form they are being vociferously opposed by the industrial community and traders, and they are currently in abeyance. Their fate remains unclear, but to conclude one would hope that the focus of FBR shifts to amending the structure rather than to increase the burden on existing taxpayers to meet the too ambitious revenue targets.
Copyright Business Recorder, 2025